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No longer cause for laughter and tears? The Indian Supreme Court's approach to awards

Nicholas Lingard and Rohit Bhat of Freshfields Bruckhaus Deringer in Singapore and Naresh Thacker and Alok Jain of Economic Laws Practice in Mumbai analyse reported Indian Supreme Court judgments since 2016 to find out how many arbitral awards have been upheld, set aside and modified and how the court’s approach has changed.

In 1981, the Supreme Court of India – dealing with a case under the old Arbitration Act of 1940 – highlighted the Indian courts’ interventionist approach when it remarked: “the way in which the proceedings […] are conducted and without an exception challenged in courts have made lawyers laugh and legal philosophers weep”.

In 1996, India enacted the Arbitration and Conciliation Act. Based on the UNCITRAL Model Law, this act endeavoured to bring about a change in approach, especially to court interventions in arbitral awards.

This was achieved to some extent, but not wholly as intended. For example, in its 2002 ruling in ONGC v Saw Pipes, the Indian Supreme Court expanded the grounds for setting aside an award to include “patent illegality”. This ground unfortunately opened the door to a merits-based review of an arbitral award.

And then, in its 2007 ruling in Venture Global, the Supreme Court held, uniquely, that an award delivered outside India could be challenged in India.

2012 saw the beginning of reform, when, in BALCO (Bharat Aluminium Company v Kaiser Aluminium Technical Services), the Supreme Court underscored the importance of a non-interventionist approach.

Since then, there has been an attempt at serious reform, both from the Supreme Court and the Indian legislature. The Arbitration and Conciliation (Amendment) Act 2015 sought to significantly narrow the scope for interference with an arbitral award, including in cases involving foreign parties (who are increasingly finding themselves in India-seated arbitrations).

Numerous Supreme Court judgments also clarified the applicable standards for setting aside arbitral awards.

In this short piece, we analyse reported Indian Supreme Court judgments from 1 January 2016 (that is, since the 2015 amendment) to understand the court’s approach to challenges to arbitral awards. How many awards has the Supreme Court upheld? How many have been set aside? How many have been modified?

But before we get into the numbers, a brief review of the post-2015 legal landscape.

The 2015 amendment and Indian Supreme Court judgments clarifying the standard of review

The 2015 amendment brought about two key changes. First, “patent illegality” as a ground to set aside an arbitral award was confined to domestic awards (where both parties were Indian, and the seat was in India).

Second, the 2015 amendment explained that violation of “public policy” – which was otherwise interpreted broadly, including to examine the merits of an award – now only meant fraud or corruption in the making of an award; contravention of the fundamental policy of Indian law; or conflict with the most basic notions of justice. The 2015 amendment also clarified that a contravention with the fundamental policy of Indian law “shall not entail a review on the merits of the dispute”. The intent to steer clear of the previous interventionist approach has since been explained in numerous Indian Supreme Court cases.

These cases have highlighted that:

  • reconsideration (or “reappreciation” in Indian parlance) of evidence is not permissible under the ground of “patent illegality”, and the illegality must go to the root of the matter;
  • mere erroneous application of the law is not a ground for setting aside an award; where two views are plausible, the court will not substitute its own view for that of the arbitrator;
  • and the courts will not interfere unless the award is perverse, in other words one that is based on no evidence, or arrives at an impossible view that no reasonable person would adopt.

As a result, there remains little doubt about the applicable standard of review and the non-interventionist philosophy it embodies. But how have these standards been applied?

By the numbers…

In an attempt to understand the Indian Supreme Court’s approach to the application of these standards, we considered 24 reported judgments from 1 January 2016 to 1 August 2020 dealing with setting-aside applications. Our analysis does not include unreported decisions and outright dismissal of special leave petitions arising from setting-aside applications. This is what we found:

  • Awards were upheld in 58% of cases (which includes cases where the court modified the applicable rate of interest).
  • Awards were modified in 21% of cases.
  • Awards were set aside in 21% of cases.
  • There appears to be a progressive increase in court interference since 2016, with the Supreme Court either setting aside or modifying awards in 53% of cases between 2018 and 2020.
  • 16% of all cases decided between 2016 and 2020 were international commercial arbitrations (where one party is not Indian), with the Supreme Court upholding awards in 75% of such cases.

In most cases where awards were set aside, the ground was “patent illegality” (which, as we mentioned, now prohibits reappreciation of evidence).

Divergent approaches

In considering these cases, we found that the key issue is one of inconsistency in approach. The standards provide discretion to the judges to decide whether the arbitrator’s view is a plausible one, and not more. The standard by its nature is fact-specific. But, in reality, the application of this standard is open to varying individual dispositions that are amplified by the vast number of courts in a country characterised by great social, cultural, economic and political diversity.

In some cases, the Indian Supreme Court, even while confirming awards, examined the evidence in detail, eventually confirming the finding of fact by the arbitral tribunal. In others, the Supreme Court is seen to have adopted a hands-off approach, choosing to only consider prima facie whether the award is reasoned and based on evidence.

Consider the following four Supreme Court cases:

  • South East Asia Marine Engineering and Constructions Ltd v Oil India Ltd (2020). This case involved the interpretation of a change in law clause in the contract. The award, which was upheld by the first-instance court, but set aside on appeal by the High Court, provided a “wide interpretation” to the relevant clause in the contract. The Supreme Court, in confirming the setting-aside of the award, examined the contract in some detail, and held that the arbitrator should have read the contract as a whole.
  • K Sugumar & Anr v Hindustan Petroleum Corporation Ltd & Anr (2018). Again, the award in this case was upheld by the first instance court, but set aside in appeal by the High Court. The Supreme Court, in a two-page order, reversed the finding of the High Court and held that the award was delivered on consideration of evidence, which could not have been reappreciated by the High Court.
  • State of Jharkand v HSS Integrated (2019). This case involved a challenge to an award on the ground that the arbitral tribunal did not properly consider the “scheme” of the contract. The Supreme Court, instead of going into the merits of the contract, found (in a short judgment) that it should not interfere once the arbitral tribunal had considered the merits and provided cogent reasons to hold that the termination was illegal.
  • MSEDCL v Datar Switchgear Ltd (2018). Here, the award was upheld by both the first-instance court and the appellate court. The Supreme Court confirmed the award. But in doing so, it went into some detail, eventually confirming the findings of fact arrived at by the arbitral tribunal.

This non-uniform approach has an obvious impact on the approach adopted by the High Courts. Consider the following two recent cases of the Delhi High Court:

  • MMTC Ltd v Anglo American Metallurgical Coal Pty Ltd (2020). In this case, the award was upheld on first-level review. But the High Court on appeal set aside the award. In doing so, it re-examined evidence, reproducing entire chains of correspondence, all of which had been considered by the arbitral tribunal. After considering the same evidence, the High Court found that the arbitral tribunal’s contextual interpretation of the correspondence was not warranted and set aside the award by adopting a literal interpretation.
  • Delhi State Industrial & Infrastructure Development Corporation Ltd v BLS Summer Joint Venture (2019). In this case, the Delhi High Court expressly refused to “delve deeper into the factual discussion and the evidence which the Arbitrator and the single Judge have relied upon”. As in Anglo American, the court was dealing with an award that had been upheld in first-level review. But instead of going into the facts, the court found that the “arbitrator is the final arbiter of issues of fact as well as interpretation of contractual provisions”.

The way forward?

The standards of review have been clarified. But the uniform application of those standards remains desirable. What is required going forward is clarity and uniformity in approach in the application of the standards.

Please Note:
This article first appeared in Global Arbitration Review.

Freshfields does not practise Indian law, but frequently serves as counsel in India-related international disputes.